Bernanke Achieves Milestone in Fed Transparency Drive With Inflation Goal
Ben S. Bernanke achieved one of his primary goals as Federal Reserve chairman yesterday by setting a numeric goal for inflation, advancing his legacy of greater transparency at the world’s most influential central bank.
The Federal Open Market Committee committed to holding inflation at 2 percent, concluding years of debate that Bernanke advanced after becoming Fed chief in 2006. Starting with his confirmation hearing in 2005, Bernanke said an inflation goal would reduce “public uncertainty” while anchoring long-run expectations about policy making.
“An important aspect of policy transparency is clarity about policy objectives,” Bernanke said in a press conference yesterday. “Clearly communicating to the public this 2 percent goal for inflation over the longer run should help foster price stability and moderate long-term interest rates.”
The Fed joins at least 12 other central banks such as the Reserve Bank of New Zealand, the central bank of Sweden and the Bank of Mexico in specifying its inflation target. Unlike many of its counterparts, the U.S. central bank must also follow a congressional mandate to promote full employment, or the maximum amount of jobs created before firms bid up wages.
The 58-year-old Fed chairman began holding press conferences for the first time last year as part of a broader effort to reveal more to the public about central bank operations. The FOMC now publishes policy makers’ forecasts four times a year, up from two during the era of Fed Chairman Alan Greenspan. In November the committee released new data that reveals its changing views on risk and uncertainty.
U.S. central bankers for the first time yesterday published their forecasts for the federal funds rate. The projections show a majority of policy makers expect the benchmark lending rate to remain below 1 percent for the next three years.
“It’s exactly what they needed to do,” said former Fed Governor Frederic Mishkin, referring to the inflation target.
“It’s extremely important to do this at the same time as they announced projections for interest-rate paths because interest rate paths really don’t make sense unless you understand how they fit into a long-run context of doing monetary policy,” said Mishkin, a professor at Columbia University’s Graduate School of Business.
Minutes of yesterday’s meeting, to be released in three weeks, will include “qualitative information” regarding FOMC participants’ expectations for the central bank’s $2.92 trillion balance sheet for the first time.
The Fed’s obligation to ensure full employment “stands on an equal footing” with the price goal, Bernanke said, adding that the central bank will be flexible in pursuing both congressionally-mandated objectives.
The central bank also announced yesterday new forecasts for inflation, gross domestic product and unemployment for the next three years. The economic forecasts show officials expect little improvement in the unemployment rate by the fourth quarter of this year compared with the 8.5 percent last month.
The personal consumption expenditures price index -- the price measure officials chose for their inflation target -- is expected to be below the 2 percent goal at the end of this year. The FOMC’s central tendency estimate for the PCE index was 1.4 to 1.8 percent for this year, 1.4 percent to 2 percent next year, and 1.6 percent to 2 percent in 2014. The measure rose to 2.5 percent for the 12 months ending November.
The inflation target “is going to build confidence in the markets,” said Mark Gertler, a New York University economist who has published research with Bernanke. “The Fed is not going to allow deflation to take hold.”
During the news conference Bernanke put the numeric inflation goal to use as a policy guide, noting that the Fed may provide more accommodation if its forecasts accurately predict that the economy is underperforming the central bank’s mandate.
“If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then the logic of our framework says we should be looking for ways to do more,” Bernanke said at the press conference.
Inflation expectations yesterday rose to 2.14 percent over the next 10 years versus 2.07 percent the previous day, according to the difference in yields on Treasury Inflation Protected Securities and nominal government bonds.
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